Labour cost advantage associated with offshoring information technology services to countries like India, China and the Philippines, are declining but the key markets for outsourcing continued to improve their attractiveness in terms of access to talent and quality certifications, according to a new report.

The latest annual survey by global management consulting firm A T Kearney found that the total compensation costs for office services employees in India, China, the Philippines, and other offshore hot-spots rose as much as 40 per cent in 2006, compared to just 10 per cent in most developed countries.

At the same time, key emerging markets continued to improve their attractiveness in terms of access to talent, industry experience, quality certifications and their regulatory environment.

"What is most striking about the results of this year's Global Services Location Index is how the relative cost advantage of the leading offshore destinations declined almost universally, while their scores for people skills and business environment rose significantly," Paul Laudicina, managing officer and chairman of the Washington based consulting firm, said.

"These findings reinforce the message that corporations making global location decisions should focus less on short-term cost considerations, and more on long-term projections of talent supply and operating conditions."

Many emerging markets boosted their skilled labour supply with double-digit growth in university enrolment and other high-tech training programmes, the report said.

However, despite these increases in costs offshore locations will remain cheaper for the foreseeable future under the most aggressive projections of wage inflation and currency appreciation in developing countries.

India, China continued to lead by wide margin the firm's annual index of the 50 best worldwide office services locations based on labor costs, skills, and overall business environment.

South East Asian countries reinforce their position as the primary alternates to India and China, with all six major ASEAN markets -- Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam--now ranked among the top 20 locations, the report said.

According to the report while total compensation costs for sample positions like IT programmers or call center representatives rose by 5-10 percent in most developed countries, average wages for similar positions in India, China, the Philippines and parts of Eastern Europe and Latin America grew anywhere from 20 per cent to 40 per cent.

"Currency appreciation and demand growth in key locations will gradually erode their cost advantage. At the same time, continued improvements in infrastructure and policy-making in emerging markets will slowly erode the business-environment competitive advantage of developed countries," said Laudicina.